Question

Financial Auditing

1. Please describe the decisions that auditors must make in testing every account balance or class of transactions in regards to sampling?

2. Please list the factors and how they influence sample size in an attribute test and,

3. in a classical variable sampling test

Answer 1

1) Below are the decisions that auditors must make before testing every account balance or class of transactions in regards to sampling-:

a) Significant account cycle-: This is one of the most important decision that auditor needs to make. If it is a significant account cycle with high account balance then auditor will accordingly select the samples. For example - The auditor takes higher sample size for high risk areas and lower sample size for less risk areas.

b) Characteristics of the population -: If the population is of similar small amounts with very large number of transactions then auditor select certain no. of samples depending upon the sampling methodology. On the other hand if no. of items in population is not large then auditor must test higher value of items. So characteristics of the population plays an important role while selecting the sample size.

c) Materiality-: Auditor needs to compute materiality before going ahead for testing of the transaction. Selecting appropriate benchmark is important decision for the auditor. Auditor needs to test all the transactions which exceeds their tolerable misstatements.

d) Relationship of the sample to the audit objective -: If small sample consists significant size of the account balance that reduces the chance of material misstatement then auditor need to consider. So auditor also considers this relationship.

2) The list of factors which influences attribute testing is as below-:

a) Audit objective-: Control testing is always done to see whether key control is working effectively or not. So sample size in attribute testing is decided after the understanding the audit objective.

b) Characteristics of population-: Attribute testing is very much depended upon the type of population. Small no. of population is sufficient if risk of failure is low and auditor does not believe that controls are not operating effectively by using past year experience. Accordingly auditor we select few samples for testing.

c) Control risk is low-: When the auditor believes that control risk is low and auditor has never identified any deva ition from the control matrix. This leads to auditor selecting few samples in current year.

d) Deviation if any is under the desired level of control risk. This also affects the no. of samples that auditor needs to test.

Above factors influences the no. of samples in attributes testing.

3) Classical variable sampling test is the old method for selecting samples. The factors that influences this sampling are type of the population, materiality, confidence level, estimated standard deviation and risk of failure. If the auditor needs more precise control then accordingly confidence level and sample size. So it directly affects the sample size. Each decision can change the no. of samples that needs to be tested by the auditor. Unlike monetary unit sampling this method presents equal chance for selection of the samples. Auditor biasness is not allowed while doing sampling under this method.